Oh No! Yelp Follows Groupon Down IPO Path

Bob Krummert

Investors gobbled up daily deal site Groupon’s stock during its initial public offering (IPO) last month. Now online review site Yelp hopes to leverage money raised by its pending IPO to speed up growth. This matters to you because, unlike Groupon, your restaurant participates in Yelp whether you want it to or not.

Prepare to have your ears blistered when you ask restaurant operators what they think of Yelp. Many will tell you they dislike it, citing one of two factors.

One is the perceived damage done to their restaurant’s revenue and reputation whenever even so much as a single negative review appears on Yelp. Bad reviews always hurt; they’re really painful when posted by unaccountable, potentially biased sources. Nothing destroys a restaurant staff’s morale like a bad review, even an anonymous one.

Yelp’s aggressive sales tactics are a second issue. The company encourages operators to buy ads on Yelp so that their online reputations can be better controlled. Online posters who complain about your restaurant get to do so for free; you have to pay if you want to respond. (See http://restaurant-hospitality.com/news/price-good-reputation-1113/index.html.)

Yelp’s IPO means that even those hoping the site would just go away will have to admit that it probably won’t. In fact, Yelp, which has yet to make a profit, aims to use the proceeds to expand its services into additional markets, (You can read the document Yelp filed with the Securities and Exchange Commission here: http://www.sec.gov/Archives/edgar/data/1345016/000119312511315562/d245328ds1.htm.) Among other revelations: 23 percent of all Yelp reviews are of restaurants.

The company expects to realize $100 million from its IPO. The price of its shares has not been set, but insiders expect Yelp to wind up with a market capitalization of $2 billion when it is.

So can an online review business really be worth such a staggering sum? Keep in mind that Groupon, another online company that feeds off the restaurant industry, was and is losing money at a prodigious rate since it went public early in November. Nonetheless, Groupon commands a market capitalization of $11 billion as we write. That’s larger than established companies such as Heinz Foods and Whole Food Markets, businesses whose assets are more tangible than Groupon’s. In fact, the wizards on Wall Street peg Groupon’s daily deal business as having a value greater than half of the companies in the Standard & Poor’s 500 index. Can this really be the case?

Yelp says it’s losing money due to nonstop expansion. The proceeds from its IPO will enable it to grow even faster. We don’t know how investors who purchase Yelp shares will fare, but the net effect for restaurants is that more operators will soon be worrying about reviews of their restaurant that appear on Yelp—and fending off sales calls from Yelp sales reps who can help you deal with any problems bad Yelp reviews create. Get used to it.